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Economics of Standards

Economics of Standards. Economics of Standards. The Standardization Problem - An Economic Analysis of Standards in Information Systems -. Research Program 403 “Competitive Advantage by Networking" Research Project B3 “Economics of Standards” Institute of Information Systems

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Economics of Standards

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  1. Economics of Standards Economics of Standards • The Standardization Problem • - An Economic Analysis of Standards • in Information Systems - Research Program 403 “Competitive Advantage by Networking" Research Project B3 “Economics of Standards” Institute of Information Systems J. W. Goethe-University Frankfurt am Main, Germany http://www.vernetzung.de http://www.vernetzung.de/eng/b3/

  2. Literatur : Buxmann, P.: Standardisierung betrieblicher Informationssysteme, Wiesbaden 1996., zugleich: Dissertation, Fachbereich Wirtschaftwissenschaften, Universität Frankfurt, 1995. Buxmann, P./Weitzel, T./König, W. (1998): Auswirkung alternativer Koordinationsmechanismen auf die Auswahl von Kommunikationsstandards, in: ZfB (Zeitschrift für Betriebswirtschaft), Ergänzungsheft 02/99 Innovation und Absatz, S. 133-151.SFB 403 FB-98-8, zugleich IWI Forschungsbericht (98-)

  3. Economics of Standards in Information Networks • Communications standards can be generally defined as rules which provide the basis for interaction between actors (man, as well as machine). • We developed models for centralized and decentralized networks illustrating the advantages and disadvantages of using standards. • Economic parameters are based on empirical research. • Approaching a general framework for analyzing the standardization problem, we combine three different research approaches: Formal analysis, a simulative approach and empirical studies (questionnaire, case studies). • The framework is being developed as part of a general network theory within the interdisciplinary research program "Competitive Advantage by Networking" at Frankfurt University

  4. Economics of Standards The standardization problem: A basic model • The nodes represent the costs of standardization (Ki) for the respective network actors i • The edges show the costs of their communications relations (cij) with their respective partners. These costs include costs of information exchange, as well as opportunity costs of sub-optimal decisions • Cost reductions can be realized only when both communicating nodes i and j have introduced the same or a compatible standard

  5. Economics of Standards in Information Networks Network (n=2)

  6. Economics of Standards Centralized coordination • Centralized coordination: • A central decision making unit (e.g. the state or a parent firm) is credited with the aggregate results

  7. Economics of Standards Centralized coordination • Centralized coordination determines a first-best solution, but... • Data problem: Given asymmetric information distribution and opportunistic behavior, complete information cannot be retrieved from all nodes at acceptable costs considering that the nodes' reporting induces resource allocation • Complexity problem: The centralized standardization problem is a combinatorial problem. Even solutions to simple centralized coordination problems are difficult because of their integer structure • Implementation problem: Systems of control and incentives guaranteeing that a given, preordained solution will be implemented by all actors also involve costs

  8. Economics of Standards in Information Networks Network (n=2)

  9. Economics of Standards Decentralized coordination Decentralized coordination: Autonomous actors make individual standardization decisions If E [U (i)] > 0, then i standardizes

  10. Economics of Standards Decentralized coordination Using all assumed data, node i can estimate pij as the probability of standardization in node j by attempting to imitate j's decision behavior:

  11. Economics of Standards Numerical simulations • A simulation model shows the problem of decentralized coordination: The Standardization Gap • 20 nodes • information costs are randomly generated (approx. normally distributed) with a standard deviation of =200 • standardization costs (normally distributed) with µ=10,000 and =1,000

  12. Economics of Standards The standardization gap Quality of decisions in a decentralized model based upon ex post network-wide savings on information costs for alternative E[cij]

  13. Comparison of centralized and decentralized coordination Economics of Standards • Generally, the frequency of standardization ceteris paribus increases with cij or a growing installed base and decreases with Ki • The risk of incorrect decisions under decentralized coordination leads to less willingness to standardize within the moderate range of values. • Network-wide savings attainable through centralized coordination determine the critical value for the costs of coordination above which a centralized solution is no longer advantageous. This value corresponds to the perpendicular distance between the curves.

  14. Interdisciplinary Research ProgramSFB 403 of the J. W. Goethe-University, Frankfurt am Main, Germany Competitive Advantage by Networking - the Development of the Frankfurt and Rhine-Main Region http://www.vernetzung.de/eng/

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